PHASE 11 DeFi · ~4 hours

DeFi Concepts

DeFi is finance rebuilt as open, composable smart contracts. If you squint, it's just stateful microservices trading tokens with ruthlessly-enforced math.

1. The four building blocks

2. AMM — the x·y = k magic

Instead of an order book, Uniswap v2 keeps a pool of two tokens. Price is defined by a constant-product invariant:

$$x \cdot y = k$$

To buy Δy of token Y, you deposit enough X so that new product ≥ k. Slippage emerges naturally: buying more moves the price.

# Python simulator
def swap_x_for_y(x, y, dx, fee=0.003):
    dx_net = dx * (1 - fee)
    dy = (y * dx_net) / (x + dx_net)
    return x + dx, y - dy, dy    # new reserves, amount out

x, y = 1000, 1000        # 1:1 pool
x, y, out = swap_x_for_y(x, y, 10)
print(out, y/x)          # ~9.87 Y out, new price ~1.02

3. Liquidity providers (LPs)

Anyone can deposit equal value of X and Y; the pool mints LP tokens representing a share. Fees (0.3% per swap on v2) accrue to LPs. Redeem LP tokens → get back proportional slice of pool.

4. Uniswap v3 — concentrated liquidity

Instead of liquidity spread from 0 to ∞, LPs specify a price range. Capital efficiency jumps ~1000× but requires active management. Think "limit orders that earn fees while waiting".

5. Lending (Aave / Compound)

• Utilization-based rates — empty pool = cheap borrow; full pool = expensive (steep curve at 80%+).
• Overcollateralization — you must deposit more than you borrow. No identity needed; the math is the underwriter.
• Liquidations are keeper-bot territory; a profession unto itself.

6. Flash loans

Borrow any amount within one transaction with zero collateral. If you don't repay by the end, the entire tx reverts — so the loan either succeeds or never happened.

// pseudo
function flashLoan(IERC20 token, uint256 amount, bytes calldata data) external {
  uint256 before = token.balanceOf(address(this));
  token.transfer(msg.sender, amount);
  IBorrower(msg.sender).onFlashLoan(token, amount, data);
  require(token.balanceOf(address(this)) >= before + fee, "not repaid");
}

Legitimate use: arbitrage, collateral swaps, liquidations. Malicious use: oracle manipulation (Phase 10).

7. Stablecoins — three flavors

8. Staking & yield

• Protocol staking — lock ETH to validate; ~3–5% APY.
• Liquid staking (Lido, Rocket Pool) — deposit ETH, get stETH that you can still DeFi with.
• Yield farming — chase rates across protocols. 100% APY usually means 100% inflation of a governance token.

9. Composability — "money legos"

Because every contract is on the same chain with public ABIs, you can chain them in one tx: flash-loan USDC → deposit to Aave → borrow ETH → swap on Uniswap → supply to Curve LP → repay flash loan. This is why DeFi UX is "a bundle of calls", not a sequence of services.

10. Project

Quiz